Fixed it
May 26, 2020
–ESM at a new high for the move this morning above 3000, and just 450 away from all-time highs set in Feb. Mini-Nasdaq is up 176 at 9582; just one more day with this magnitude gain will eclipse the high settle in Feb of 9754.25. Everything is back to normal! Why, the Chicago Tribune even ran a story (nearly pushing Covid off the page) with this headline: ‘By Monday morning, 9 people had been shot and killed in Chicago, making it the deadliest Memorial Day weekend since 2015’. Ahhhh, normalcy.
–Bonds are down, but still in their two-month range. For example WNM (June ultra bond) currently trades 220, with a triple bottom low around 217-16. Friday was quiet with a slight bias toward flattening which has been erased this morning with front contracts -1 and blues (4th year) -4. The wall of liquidity upon which the stocks are surfing would ordinarily spell trouble for bonds, but the Fed is still there, providing a not-too-subtle backstop. If bonds do break recent lows, then I think vol will rise with higher rates, especially given current levels. Not sure of timing, but tempted to consider put ratios, long more of the lower strikes.
–Gold is down $13 but silver is up $0.13, pushing gold/silver ratio to a new recent low of 99.5, lowest since March, prior to the pandemic surge to 124.
–News today includes Chicago Fed National Activity and New Home Sales for April, expected to be down 23%.
The Road to Recovery
May 24, 2020 – Weekly comment
Last week we had Maria Bartiromo’s morning show streaming, and her guest was gushing that he had his best month ever. He had something to do with RVs (recreational vehicles); the company might have been RVshare.com, an Airbnb for RVs.
Of course! Can’t fly. Have time off. Shelter at home. Just drive the (motor) home across the country!
Yes. That, my friends, is a picture of the Thor Motor Coach Tuscany, which you can pick up for about $300k. And, gas is cheap. Looks comfortable enough, but I’d rather fly. According to RVshare, prices are $160 to $250 per day. Of course, Chicago is relatively close to the RV capital of the world, Elkhart, Indiana, so maybe prices are slightly less expensive from this location. It would be great if they made a movie with the RV storyline. Oh, they already did. ‘Lost in America’ from 1985. Albert Brooks is passed up for a promotion as an advertising executive and convinces his wife to sell everything and travel the country in a Winnebago.
Since we’re on the subject, way back in the old CME floor days, a friend of mine rented a RV, hired a couple of strippers and a driver, and transported his clients from Chicago to the Indy 500. I really don’t condone that sort of thing. I’d rather see the Kentucky Derby. But if I said, at the time, that I didn’t harbor just a twinge of jealously mixed with admiration, I’d be lying.
Anyway, back into the world of prices and interest rates. The Fed’s Vice Chair Richard Clarida gave a speech last week outlining the Fed’s actions which led to a significant easing of financial conditions, “…buying some time until the economy can begin to recover, growth resumes, and unemployment begins to fall.” He said that his “projection is for the COVID19 contagion shock to be disinflationary, not inflationary…” both in the near and medium term. Forward guidance. He adds, when “we are confident the economy is solidly on the road to recovery, we will wind down these lending facilities at such time as we determine the circumstances we confront are no longer unusual or exigent.” Right. We all know how smooth the path to ‘normalization’ is after the drug-fueled liquidity surge. Here’s a chart which indicates the remarkable job the Fed has done, helped by low energy prices.
Why it’s Winnebago! It ended Friday above $58, having nearly completely recouped the 75% covid drop. Low finance rates. Cheap gas. It took over a year to recover from the late 2018 sell off. The same magnitude rally in two months. Breathtaking.
Perhaps the RV story is an appropriate parable of the US turning inward. This was a week that China made moves to further stifle Hong Kong’s autonomy, with Trump warning the US would respond “very strongly”. In my opinion, control measures by China will inexorably move from HK to Taiwan. However, the US is curtailing its globalist instincts.
At the same time, the Fed is expanding its control measures as well, in the realm of financial markets. Why should there be hedging of rates and risks? Perhaps that’s why CME (-1.2%) and ICE (+0.3%) were flattish on a week where SPX rallied 3.2%.
Eurodollar futures from EDM’20 to EDH’23, the next three years, are 20.5 to 36 bps, 99.795 to 99.64. The two-year yield ended at 16.6 and the five-yr at 33.3 bps. Biggest mover on the week was the long bond which rose 5.6 to 1.37%. 5/30 closed at 103.7, up 3 on the week, while 2/10 was barely changed at 49.3. The upcoming week is somewhat light on economic data. On Friday we’ll get PCE Core prices, expected 1.1% year-over-year. U of M final 1-yr and 5-10yr inflation numbers for May are also released; the initial readings were +3.0% and +2.6%. Much different from Clarida’s expectations.
Below is a nice visual of the Fed’s handiwork in terms of easing financial conditions. TY vol has plunged from a high over 13 in March to 3.8 on Friday. I guess we’ll call it ‘reversion to mean’. 3-month libor has settled around 37 bps, having been as high as 145 in March.
OTHER MARKET/TRADE THOUGHTS
Week over week change in EDU1 was -1.5 from 9981 to 9979.5 (this is still the high point on the curve). EDU3 was -3.5 from 9959.5 to 9956.0. Miniscule changes but the bias towards a steeper curve from rather flat levels remains.
It’s interesting to compare spreads in dollars, euribor and short sterling. Here are M0/M1, M1/M2 and M2/M3 in $, € and £. Dollars -11.25, +5.0 and +14.5. Euribor -10.0, +1.0 and +5.5. Sterling -11.0, +3.5 and +7.0. All are equally negative in the front end of the curve, but the US diverges to somewhat higher deferred spreads, which I loosely perceive as an expectation the US will emerge from the virus slowdown somewhat more quickly.
| 5/15/2020 | 5/22/2020 | chg | ||
| UST 2Y | 14.7 | 16.6 | 1.9 | |
| UST 5Y | 30.7 | 33.3 | 2.6 | |
| UST 10Y | 63.8 | 65.9 | 2.1 | |
| UST 30Y | 131.4 | 137.0 | 5.6 | |
| GERM 2Y | -72.8 | -68.0 | 4.8 | |
| GERM 10Y | -53.1 | -48.7 | 4.4 | |
| JPN 30Y | 47.3 | 44.9 | -2.4 | |
| EURO$ M0/M1 | -13.0 | -11.3 | 1.8 | |
| EURO$ M1/M2 | 3.5 | 5.0 | 1.5 | |
| EUR | 108.17 | 108.98 | 0.81 | |
| CRUDE (active) | 29.52 | 33.25 | 3.73 | |
| SPX | 2863.70 | 2955.45 | 91.75 | 3.2% |
| VIX | 31.89 | 28.16 | -3.73 | |
Hong Kong autonomy dissolved. Illinois next
May 22, 2020
–The Hang Seng index fell 5.5% as China smothers Hong Kong’s autonomy. Shanghai Comp down 1.9% as well with China deciding to forgo forward guidance related to growth targets. By contrast Kospi down 1.4% and Nikkei down less than 1%. Treasuries are seeing a bid on the day of June option expiration. TYM 139.25c settled 4 vs 139-02 and are now at breakeven with TYM trading 139-10. Last week’s high in the contract was 139-21. Ten year yield now just below 64 bps and the new 20yr is just under 111 bps, 11 below the auction yield.
–In yesterday’s note I mentioned that on Wednesday, TYN 139^ settled 1’30, just above 4% vol and said: “If we’re at the same futures level (TYU0 138-25) the straddle would be 1’22 on Tuesday at the same vol.” Well, it didn’t take long to evaporate holiday weekend time value: TYU0 settled unch’d at 138-25 and the 139^ settled 1’20 which I mark at just 3.9. Of course, with new dynamics concerning HK, treasury vol will likely find its footing.
–Yesterday the Fed’s Clarida made a speech where he highlighted the easing of financial conditions. “…we have deployed our entire toolkit…” Hmmm, does that mean it’s EMPTY now? He also emphasized that the Fed is a ‘lender’ and cannot ‘spend’, which is in the domain of Congress. “The Fed can only make loans to solvent entities with the expectation the loans will be paid back.” Not so fast Illinois. An article in the Bond Buyer reports that Illinois is “…expected to include a debt authorization allowing the state to access the Fed’s Municipal Liquidity Facility for up to $4.5 billion.” * Fed lending officer reviewing the Illinois application under his green shade as Gov Pritzker shuffles his feet on the other side of a vast mahogany desk. “I see that you’d like to borrow $4.5 billion from the Fed. However, your credit score barely registers a pulse and your unpaid bills have piled up to $14.3 billion according to your Comptroller’s report. We see that you have issued bonds previously to chip away at unpaid bills, yet they’ve continued to grow, causing your outstanding bonds to trade at junk levels. You’re technically insolvent, I am afraid I am going to have to reject this application. *Reaches for the red ink pad and rubber stamp.*
FB worth more than JPM+BAC+WFC+GS
May 21, 2020
–For the past month ESM has been in a clearly defined range of 2755 to 2965. Yesterday the high was 2975, indicating the possibility of an upside breakout. However, a few Trump tweets targeting China were enough to push the market back into lockdown range this morning (now 2950). Buyers of yesterday’s 20-yr auction were aided and abetted by Trump’s evening escalation. Nice buys! …in front of the scheduled Fed purchases today of longer dated issues ($3b 7s to 20s and $2b 20s to 30s). The auction yield was 1.22, with a yield late yesterday of 1.18 and this morning at 1.155 (I’ve instructed the desk to unload our auction buys just before Lorie Logan steps in).
–Fed minutes unsurprisingly discussed more specific forward guidance. Yesterday EDM0 ended at 99.71, the highest settle for the front quarterly of the move. Futures are indicating a further drop in libor; previous sales of EDM0 9962.5 straddles from 10 to 8.5 are seeing the calls paritize…now 8.5 in the money. Overall volume continues to be light, with little official news scheduled until after the holiday. TYN 139 straddle settled just above 4% vol at 1’30. If we’re at the same futures level (TYU 138-25) the straddle would be 1’22 on Tuesday at the same vol.
–FB hit a new all-time high with market cap $655B. Chart below is from Holger Zschaepitz (taken from twitter) showing that total market cap of this Magnificent 7, AAPL, AMZN, FB, GOOGL, MSFT, NFLX, NVDA has soared to a new high over $6 trillion. That’s in comparison to an economy producing $21.5 T, no make that $19.3 T. No make that $17 T… well, who knows what this year’s GDP will be, but certainly lower. By contrast, top 7 financials, JPM, BAC, WFC, C, GS, MS, USB total $851.7 billion. In other words, FB is getting close to entire banking industry. Makes me a little queasy.
–DISCLAIMER for the COMPLIANCE dept. The “instructing the desk” line is intended to be sarcasm. A joke. Lorie Logan runs the NY Fed desk and is a close personal friend of mine. I don’t think GDP is going to be as low as $17 trillion this year. That too, was a joke. I think.
20 year auction: $20 billion
May 20, 2020
–May 20, 2020 and the treasury is auctioning $20 billion of 20 year bonds. W/I was 1.22 late yesterday. Also today Fed minutes from the April meeting will be released.
–Yesterday’s QE operation was the largest of the week, a purchase of $9.5 billion of maturities under 2.5 years. Tomorrow the Fed buys 4.5b of 4.5 to 7 year and 1.5b in tips and on Thursday $2b 20-30 year and $3b 7 to 20. So effectively the Fed is taking about one fourth of the 20 year with Thursday’s buys.
–Not much of interest yesterday aside from a late stock sell off. This morning ESM has completely erased yesterday’s swoon, trading +30 at 2948.75 and climbing, essentially back at Friday’s closing level. Implieds remain subdued in rates. June treasury options expire Friday with TYM 138.75^ settling 29 yesterday. Euro$ curve took back a smidgen of Monday’s steepener with reds +1.625, greens +2.375, blues +3.75 and golds +4.0. Volume has fallen significantly. CME and ICE shares both fell over 3% yesterday while SPX was -1.6%.
–Silver has continued to skyrocket, with the July contract up nearly 20% from $15 to $18 oz in the past 11 sessions.
–In front of the Fed minutes there are now NO Fed Fund futures above 100. The market seems to be taking the Fed at its word that it’s not going that route. Perhaps the minutes will reinforce the message.
Curve springs to life as stocks surge
May 19, 2020
–The very front end of the market appears to be more stable after the stunning drop in libor over the past month or so. Three month libor was 0.3766 yesterday, comfortably settling in around 3/8%. EDM0 closed at 99.67, and the 9962.5 straddle has been consistently sold from 10 a few days ago down to 8 and 7.5 yesterday, where it settled. However, yields surged at the long end, with the thirty year rising 13 bps to 1.444% in front of tomorrow’s maiden 20 year auction (w/i was 1.23% at the time of futures settle). Of course, the explosive rally in stocks accounts for a large part of fixed income weakness, with SPX +3.15% to a new recent high and Nasdaq +2.4%. Moderna (MRNA) which announced a promising vaccine candidate sparking the broader rally, had traded below 20 in the middle of March and closed at 80 yesterday, a four-bagger in two months!
–The curve steepened with 2/10 notching a new recent high at 55.5. Twos rose 3.4 to 18.1 while tens jumped 9.8 to 73.6. 5/30 closed 107, just below the spike high of 110 in March. June treasury options expire on Friday. TYM0 settled 138-19 and TYM 138.5^ at 0’36.
–Fed fund contracts have substantially withdrawn their support for negative yields. The peak area of that curve is July’21 to Jan’22, where all contracts settled at 100.00 to 100.005. Peak ED contracts are still the first two reds, M’21 and U’21 which settled 99.775. New recent highs posted in ED calendar spreads from reds back. Red/green settled 10.875 and red/gold rose nearly 7 bps on the day to 48.875.
–Powell and Mnuchin testify before Congress today. Housing Starts were down 22% last and will likely be just as bad this time.
Gold and U of M inflation expectations
May 18, 2020
Two and five year treasury yields ended the week near historic lows at 14.7 bps and 30.7 bps respectively. The ten year ended at 64 bps, just 10 higher than the all-time low of 54 set March 9, and the 30-yr at 133, having gotten just a shade below 1% in early March.
Zoltan Pozsar of Credit Suisse put out a note last week suggesting that libor-OIS could tighten to 10-20 bps by the end of June. Given a Fed Effective rate of 5 bps in the month of May, and a SOFR of 2 to 6 bps, EDM0 and EDU0 remain cheap given this potential tightening. EDM0 settled 99.675 or 32.5 bps and EDU0 at 99.715 or 28.5 bps. Pozsar’s prediction would put libor at 15 to 25 bps, a Eurodollar equivalent price of 99.75 to 99.85. Powell’s comments that the Fed was not considering negative rates likely makes 99.85 a soft cap for now.
These price levels have already been achieved by the reds. The peak contract on the curve is EDU’21, having settled Friday at 99.81. The all-time high this month is 99.825. This compares to the previous high set in December of 2012 at 99.63. At that time EFFR was 16 to 17, so libor-ois was around 20.
The high for gold in 2012 was $1790/oz. In September of 2011 it peaked at $1900. Interestingly, silver’s high in 2011 was nearly $50/oz compared to Friday at $16.61. The gold/silver ratio in late 2011 to 2012 was between 40 and 60. In March of this year it hit a high of 125 and is now 102. Gold is giving a glimmer of inflationary prospects or increasing financial stress or perhaps both, trading this morning at $1761 with silver at $17.30.
On Friday, the University of Michigan released its survey which includes long term inflationary expectations which surprisingly bounced to 2.6% from 2.5. The gap between the ten year yield and the 5-10 year inflation expectation is just over 195 bps, which appears to be a record. Obviously actual inflation has declined as oil prices plunged and other suddenly unneeded inventory was discounted. The question going forward is how this divergence will resolve. Higher prices which pull yields up, or dampened future expectations to justify today’s yields? The U of M survey suggests the former, but keep in mind this was a preliminary reading. In any case, extraordinary treasury supply necessitated by gaping budget holes should serve to keep yields from continuing lower.
Powell’s 60 Minutes interview aired last night, but excerpts on news sites indicate that he’s optimistic the economy will recover, though uncertain as to timing, saying it might stretch through the end of next year. However, he noted that his optimism assumed there is not a second wave of Corona in the fall.
| 5/8/2020 | 5/15/2020 | chg | ||
| UST 2Y | 14.9 | 14.7 | -0.2 | |
| UST 5Y | 32.3 | 30.7 | -1.6 | |
| UST 10Y | 67.8 | 63.8 | -4.0 | |
| UST 30Y | 138.2 | 131.4 | -6.8 | |
| GERM 2Y | -77.8 | -72.8 | 5.0 | |
| GERM 10Y | -53.7 | -53.1 | 0.6 | |
| JPN 30Y | 45.2 | 47.3 | 2.1 | |
| EURO$ M0/M1 | -14.5 | -13.0 | 1.5 | |
| EURO$ M1/M2 | 3.5 | 3.5 | 0.0 | |
| EUR | 109.71 | 108.17 | -1.54 | |
| CRUDE (active) | 26.17 | 29.52 | 3.35 | |
| SPX | 2929.80 | 2863.70 | -66.10 | -2.3% |
| VIX | 27.98 | 31.89 | 3.91 |
Is silver telling us something about future inflation?
May 15, 2020
–July Silver is up another 45 cents this morning to 16.05, having been 14.94 two Fridays ago. Precious metals and bitcoin appear to be responding to unprecedented stimulus, and stocks also perked up yesterday with bank shares having potentially formed bottoms. Yields again fell yesterday, in light trade. Tens dropped 2.8 bps to 62. The two year ended at 15.1 bps, the five year was double that at 30.2, the ten year was double that at 62, and the thirty year was just over double that at 129.9.
–On Wednesday, Illinois was able to sell $800 million in general obligation bonds at a high yield of 5.85%. Tax free. According to the Reuters article I saw, Illinois is pretty much trading like junk. Really? Here is yet another dichotomy laid bare by COVID: the fragile underpinnings of Illinois’ budget, weakened by years of corruption, are now crumbling. The fountain of stimulus from the Fed and the federal gov’t cannot save all zombies, and states, (like Dave Portnoy), do not have unlimited cash. Which is why there can be no V. (Illinois is said to contribute 4.3% to US GDP).
–If Illinois had a currency, it would be trading like XAUEUR (gold in euro) which is pressing new highs this morning at 1603 (meaning that gold priced in the IL ccy would be parabolic). Before the debacle of Q4 2018, as the Fed was unwittingly pressing ahead with its tightening campaign, XAUEUR was 1000. From there it has only risen. EURUSD is now gravitating around 108. It had made a low of around 103.50, a level which I think we’ll re-visit sometime this summer.
–US Retail Sales today for April, expected -12%. Industrial Production also expected -12%. I suppose the U of M inflation survey numbers could be interesting. The one year forward expectation was 2.1% last, and the five-year was 2.5%. Although recent inflation data are soft and the ten year breakeven as indicated by inflation-indexed bonds is only 107 bps, I am thinking the U of M expectations will remain quite firm… leaning more toward the signals being sent by silver and less toward the signal sent by the US ten year.
When logic and proportion have fallen sloppy dead
May 14, 2020
–Powell dismissed the possibility of going down the rabbit hole of negative rates saying the Fed’s “…view on negative rates has not changed.” However, the market’s view on rates still allows for the possibility of that outcome with FFH1 settling at exactly 100 and a few of the following contracts a couple of bps higher. The two year note is hanging around mid-teens, ending yesterday at 15.7, and the peak eurodollar contract EDU21 is only 20 bps at 99.80. The ten year yield ended at 64.8, having just been auctioned at 70 on Tuesday. In dollars, the red/green pack spread notched a new low at just 6.5 bps, down 1.75 on the day. I believe this is a record high close for the green pack (average of the third year contracts) at 99.72875. The curve flattened as buyers are simply forced in at longer maturities.
–Three month libor set yesterday at 0.392 and EDM0 at 99.66 or 34 bps. The yawning divergence between libor and near ED contracts has thus closed, and ED straddle prices remain subdued.
–Many commentators and analysts have opined that stock market lows have been set with the plunge in March. However, large investors like Druckenmiller and David Tepper (yesterday) have thrown shade at current valuations. Let’s start at the front of the alphabet. AA (Alcoa) had fallen 76% from the start of the year to the March low, and has now recovered to being down only 68%. AAL (American Airlines) is below the March low, and below the subsequent low made in early April, and below the next low made earlier this month. The chart looks like a plane bouncing in for a sloppy landing. I won’t go through the entire alphabet, but WFC (Wells Fargo) deserves a shout-out as well, having made a brand new low on the largest volume of the year. GET ME OUT. Sure, some stocks have recovered most of March’s losses. But it’s a little early to say we’re out of the woods.
–Now just a few days from expiration of the June Crude oil contract which is currently trading [positive] 26.66. Quite a bit different from the May contract expiration when prices plunged to negative 37.00, and the June contract set a low of 6.50. Many clearing firms have now restricted access to the front contract, or at least required a mask and social distance. There are now 137k open in CLM0 vs a high in that contract of 582k during last month’s festivities. Last trading day in 19-May.
“Why, sometimes I’ve believed as many as six impossible things before breakfast.”
Negative rate insurance
May 13, 2020
–Stocks slid yesterday afternoon as LA county said the lockdown could be extended for three more months, and Druckenmiller said risk-reward for stocks is as bad as he’s ever seen. ESM fell more than 70 points to a low of 2838, extending in today’s session to 2825, but has now rebounded above 2870. CA university system said to cancel fall classes.
–Ten year auction was well-received at a yield of a mere 70 bps, even as the fed’l government reported an April deficit of $738 billion. One month! Previously that would have been a gargantuan shortfall over one year! The front end of the curve came under some selling pressure in front of Powell’s testimony today. The drop in libor has been rapid, with 3-month now at around 43 bps. With the serial May ED contract expiring Monday, there are still nearly 5 bps of convergence given a settlement of 99.6175 (38.25 bps) in EDK0. EDM0 settled 9964; there was a reasonable amount of selling in EDM0 9962^ from 9.5 to 8.0 (settled 8.5). Poor performer on the curve was EDU0 which settled -2.5 at 99.69, while longer dated contracts settled positive on the day. For example, EDU1 closed +1.0 at 9981.5, leading to a new recent low in EDU0/EDU1 of -12.5.
–A notable feature on the day was buying of EDM21 negative rate calls in front of Powell. EDM1 100.25 and 100.37 calls bought in size >20k each, settled 4.75 and 3.75. They probably thought the guy at Wimbledon was crazy for buying pandemic insurance too. This buying just before Powell, who is likely to reinforce what sev’l Fed officials have already telegraphed, namely that the Fed will avoid negative rates, seems oddly timed. But there is over a year of time value, and a lot can change in a year. If Powell doesn’t FORCEFULLY close the door on negative rates, this trade may perform.
–BBG has a headline noting that JPM thinks costs of negative rates may outweigh benefits. Another article bolsters the global nationalistic trend which augurs poorly for global trade: India’s Modi says the country must become more self-reliant.
–PPI and 30 yr auction today. At futures close yesterday w/i was 1.395/1.385
